China's forex record gets US out of jam

By IBT Staff Reporter On 07/17/09 AT 12:58 PM

China's foreign exchange reserves are surging again, which, according to the report of People's Daily Online, helps the Obama administration drag its economy out of a recession by holding a record-high US debt by the end of May.

According to the latest statistics released by the People's Bank of China on Wednesday, China's foreign exchange reserves rose by a record $178 billion in the second quarter to top $2.13 trillion for the first time by the end of June, up 17.84% year on year. The amount is close to two-thirds the size of China's economy and the equivalent of Italy's gross domestic product in 2006.

The cash holdings are growing as the central bank sells its currency, the yuan, to prevent an appreciation that would make the country's exports more expensive, People's Daily Online reported on Friday.

People are talking about whether the Chinese may actually one day dump the dollar and Treasuries because of the problem in the US, but they are missing the point, said Stephen Jen, head of macroeconomics and currencies in London at BlueGold Capital LLP, which manages $1.1 billion. The reserves are so big because China needs to keep the exchange rate stable for its exports. Therefore, they have to keep buying dollar assets.

The need to temper gains in its currency led China, the biggest overseas holder of Treasuries, to more than double its holdings of US government notes and bonds in three years to $763.5 billion in April, according to US Treasury data. The amount was equivalent to 38% of its reserves at the time.

Zhou Xiaochuan, governor of the China's central bank, told reporters on the sideline of the annual meeting of the Bank for International Settlements in June that China would maintain the stability and consistency of its foreign exchange reserves policies, emphasizing liquidity, safety and returns.

China would not abruptly change its current policies on foreign exchange reserves, Zhou said.

As the Chinese were becoming more vocal in regard to the need to move away from the US dollar, they were in actual fact buying more dollars than ever, said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd.

China have become more vocal in regard to the need to move away the US dollars in the recent months, calling for the diversification of international currency reserves and less reliance on the dollar.

However, we should look at what officials are doing, not what they are saying, said Marc Chandler, Global Head of Currency Strategy from Brown Brothers Harriman. There is no evidence that central banks have diversified reserve holdings, Chandler told IBTimes.

In the H2 08, China increased its Treasury holdings by 38% and continued to buy through the first quarter 2009 before turning modest sellers in April, Chandler said.

The dollar's share of global reserves increased to 65% in the first three months of this year, the most since 2007, according to the International Monetary Fund.

China has been trying to reduce its reliance on the US currency in other ways, however. It signed 650 billion yuan of currency swaps since December with nations from Argentina to Belarus and is encouraging trading partners to use the yuan to settle cross-border trade.

The government is considering purchasing $50 billion of the IMF's bonds after the Group of 20 leaders on April 2 gave the international lender approval to boost its war chest by $500 billion.

China can afford that and more because its reserves will increase by more than $200 billion annually in coming years, said Wang Tao, an economist with UBS AG in Beijing. Increasing its strategic oil reserve to 90 days of imports, the nation's target for 2020, would take another $50 billion, Wang said.

China on Wednesday loosened its control on overseas investment by domestic companies to boost outbound investment starting Aug 1, 2009.

It also appointed Yi Gang, a former deputy governor of the country's central bank, as new head of the State Administration of Foreign Exchanges(SAFE), according to a statement on the SAFE's website Friday.